With elections behind them, Greece goes to bat with Germany

Greece's emerging government is expected to ask for more time to implement austerity measures. Germany is saying no. One side will have to back down.

Greek elections signaled a desire among Greeks to stay in the eurozone, and today the leaders of the party that won this week's poll are expected to announce a government coalition that is ready to accomplish European Union reforms.

But the storm clouds are hardly gone. A larger showdown over whether ailing Greece can actually stay in the eurozone is taking shape between Germany and Greece.

German Chancellor Angela Merkel, the architect of European austerity, will in a sense square off with Greek forces, like the opposition far-left Syriza party, opposed to strict austerity attached to a recent bailout agreement. Ms. Merkel and Syriza now appear to represent the two "hard" bargaining positions, say analysts. Syriza and other anti-bailout parties in Greece received more than 50 percent of the votes in the June 17 election and are willing to think the previously unthinkable: Greece out of the eurozone.

Minutes after the vote in Athens, Greek officials and former prime minister George Papandreou said the nation needs up to two more years of assistance and growth packages to survive and to make public spending cuts, something that would require renegotiating the terms of the bailout. Ms. Merkel immediately said at the G-20 summit in Los Cabos, Mexico: “There won’t be any changes to the memorandum of understanding… The new government in Greece must fulfill their commitments quickly.”

The future of Greece will be fought out in the coming months on the middle ground between the Merkel and Syriza positions, analysts say – even as EU attention focuses more on Italy and Spain, the latter of which continued to rattle markets as its 10-year bond rate jumped over 7 percent.

Philippe Waechter of Natixis Asset Management Group in Paris said yesterday, “You have to now negotiate a bailout plan to give oxygen to a Greek economy grasping for air, and after a strong showing by the Greek far-left party Syriza.”

Merkel said two years ago that Greece should never have been allowed into the eurozone; Syriza leader Alexis Tsipras ran on the platform not of leaving the eurozone, but of not staying under the terms set in the current agreement.

But the German position may have more play than Merkel suggests. In the run up to the Greek elections, German Foreign Minister Guido Westerwelle and other senior German figures suggested more generous terms may be offered to a responsible Greek coalition – one that is willing to work with the EU – even if his comments were termed unofficial.

The Wall Street Journal reported today, citing Brussels sources, that Greek officials are already looking to other eurozone nations, presumably to pressure Germany for more time and an additional $16 billion to make it through the summer.

The core problem is that no serious analyst projects that Greece, which agreed to $218 billion in exchange for structural reforms, will be able to sustain itself under a current agreement that requires it to have a budget surplus in two years.

“Greek leadership is too weak. Greece can’t make it by itself. Greece is helpless,” argues Takis Pappis, a political scientist at the European University Institute in Florence, Italy. “Can Greece solve this problem on its own? I don’t think so. The ball is on the German side. They must find, and Europe must find, a solution and a way to be an enforcer.”

Simon Tilford at the Center for European Reform in London says that “it is mathematically impossible” for Greece to grow out of its position at a time its economy is contracting 6 to 7 percent.

Syriza refused yesterday to be part of a new government coalition that is expected to be announced later today. But along with the Communist party and other anti-EU memorandum parties and the neo-Nazi party Golden Dawn that scored a surprising 7 percent, Syriza is a reminder of a stark alternative: Greece outside Europe.

“Do you want a third world country in your neighborhood?” asks Mr. Pappis. “You don’t.”

Whether Merkel will relent and accept something short of a major renegotiation on Greece at a time when other European leaders are also pressing her for changes is unclear. Berlin has said its policies are necessary to continue reforms in a country that has been unwilling to end corruption or pay private taxes.

In the past two weeks, in the middle of the Spanish banking crisis and ahead of the Greek elections, Merkel has twice warned that Europe must solve its problems “step by step,” that Germany’s power to intervene “is not unlimited,” and warned against outside efforts to change German policy that are “simple” and “counterproductive.”

The subject is under discussion at the G-20 meeting happening today; will get raised June 22 at a meeting of the leaders of Italy, Germany, France, and Spain; and receive further emphasis at a major EU summit on June 28.